Newsletter

Renouncing US Tax Obligations Beyond Borders

This is the mentality of an increasing group of US Americans who are making the seemingly drastic decision to forgo their citizenship. With income tax burdens for those living outside US territory becoming more onerous, many have chosen the route of having obligations to one less government.

The United States, the only nation in the Organization for Economic Cooperation and Development that taxes citizens independent of where they reside, has always collected income tax on its citizens who live elsewhere; this phenomenon is not new. What is new is Fatca, the latest tax law — slated to take effect in July, 2014. It will require all international financial institutions globally to report directly to the US Internal Revenue Service all assets and incomes of any US citizens with US$50,000 or more on their books.

And with Fatca lies the real reason for the increase in desertions. With deficit reduction the motive behind the law, the US government is putting the patriotic pinch on its own citizens. In return, US Americans are thinking twice about which passport they choose to carry. And the numbers are evident.

Expatriates relinquishing their nationality at US embassies surged in the second quarter of 2013 to 1,131, in comparison with 189 for the same period in 2012. By the close of the second quarter, the total was at 1,810 — setting a pace for 2013 to have the highest desertion rate on record.

The benefit of having more than one passport is well documented, and one from the United States has long held high value. Furthermore, giving up one’s citizenship is not a decision to be taken lightly. But with the US government using Fatca to monitor greater aspects of peoples’ lives, citizens are fighting back and taking the plunge in unprecedented numbers.

And it’s not just the wealthy expatriates escaping tax obligations. With the increase in tax reporting — and the increased paperwork and risk of taxpayer misstep that comes with it — ordinary earners are being dragged into an expensive, time-consuming, and bureaucratic nightmare that routinely costs more than $2,000 in annual accounting expenses.

“I don’t know any Americans abroad who aren’t thinking about giving it up,” says Victoria Ferauge, who currently lives in France. Another US American with similar sentiments, who didn’t release her name, told the BBC, “In the end, I sleep better now knowing that I no longer have to worry about the U.S. requirements. I will never be able to live or own property in the U.S. but I can visit and that’s enough for me.”

Relinquishing your citizenship doesn’t come free, either. The US government charges many citizens wanting to give up their citizenship with an “exit tax” for the privilege of leaving.

The exit tax applies to those classified as “covered expatriates.” To qualify for this status there are three criterion: to have been paying high US federal taxes previously, to have a net worth of $2 million or higher, or be someone who is unable to certify, under oath, that he has been in complete compliance with all US tax regulations for the five years immediately preceding expatriating.

The vague criterion for the third option opens the door for creative interpretation as to who ultimately constitutes a “covered expatriate.” And the cost doesn’t end there.

As immigration lawyer Eugene Chow also points out, assets, both domestic and international, are also taxed at a rate of 15 percent — an appreciation rate for capital gains regardless of whether the assets have been sold.

US citizens aren’t the only ones fighting back against the law. Financial institutions too find themselves targets and, with their push back, many US citizens are stuck in no man’s land in terms of banking.

With the IRS mandating the reporting of financial assets of US clients, institutions are taking a thanks-but-no-thanks approach. Banks, in addition to hefty fines, could also be subject to withholding of 30 percent on their clients’ US-sourced income streams if they fail to comply.

Overlooked is that this is ultimately another act on the part of the United States to lower its deficit. Rather than consider new ways to curb its own spending, laws like Fatca — despite its minority elitist target — force ordinary citizens to jump through hoops simply to accomplish day-to-day actions.

21st Century Socialism’s Race to the Extreme

EspañolThe Road to Serfdom, Friedrich A. Hayek’s masterpiece, was published for the first time in March of 1944. In it, the author expounds the incompatible nature of economic planning and individual freedom. Above all, however, he states that the governments that set off down the path of planning to foster social justice, wealth distribution, and the like, invariably end up spreading the scope of the state and gradually becoming the most extreme totalitarian regimes.
Despite the fact that this book was first published almost 70 years ago, it can still teach us much about the state of affairs in Latin America today. Hayek accurately describes four processes that are currently ongoing. First, the widening of the state in order to reach goals considered to be morally superior, such as ending poverty. Second, the author proves that not only does such widening not help with reaching those goals, it worsens the situation and creates new problems. Third, the state’s response is to stretch its power even more — with the justification is that it needs to fight the problems it itself caused. Fourth, and consequently, any remains of freedom are destroyed and a totalitarian regime rises instead.
The countries that have embraced so-called “21st Century Socialism” are rapidly undergoing these four processes. One of the main factors that drove Evo Morales to win the presidential election in Bolivia was his alleged defense of the right of his people to produce coca leaf. But his power has broadened so much that now even that goal has been replaced by a resolute war against drug trafficking.
Argentina’s example is even more striking. The Supreme Court’s recent decision to declare the constitutionality of the Media Law (la ley de medios), which clearly violates freedom of speech, is a way to limit the ability of the media to plainly show the government’s string of failures in the economic sphere and its scandals of corruption and persecution of the opposition.
Venezuela is the epitome of this description. It is as if the architects of 21st Century Socialism, instead of studying Karl Marx, were following Friedrich Hayek’s work step by step, specifically to exemplify the process described by the Austrian author. The Venezuelan regime presented its model as a break from a past of public corruption and promised a future of inclusion for the impoverished majorities. That aim has justified constant and growing interventions in the economy by the state.
However, not only has it failed in its attempt, it has succeeded in creating new problems in the country. Poverty was not eradicated, equality was not achieved, and corruption was not fought; rather, the opposite has proceeded. Additionally, new problems have appeared: inflation, scarcity of goods, fleeing investors, infrastructure failure, and even a reduction in oil production, the one resource that finances the so-called Bolivarian Revolution.
In this context, the response has been ever-higher state intervention, both in the economic sphere and in society. From the social point of view, Venezuela is now a statist society, at least in three dimensions: the reduction of the democratic arenas and the government’s control of public discourse; the militarization of civil society; and the state’s intervention in the media, religion, and people’s private lives. The situation is so bad that even happiness is now a bureaucratic function.
Apart from all this, an irritating cult surrounding the deceased Hugo Chávez has arisen and been reinforced through revelations such as the little birds the current President Nicolás Maduro speaks with, or Chávez’s alleged apparitions at the metro in Caracas. This is complemented by demagogic activism at the international level. The search for international enemies — mostly the United States and Colombia — is still the main strategy.
Now, private companies are caught up in this statism too, and the latest is the confrontation with Twitter. Maduro has even stated the absurd possibility of creating a similar social network for South America. However, the confrontation’s sole aim is to draw attention away from the regime’s challenges, externalize its faults and, as a solution, assert the need for an even bigger state.
Some specialists argue that calling these Latin-American regimes totalitarian is an exaggeration, and they are probably right if we base ourselves in the current reality (Cuba being an exception). Nevertheless, defending their current position forgets the trajectory of these Latin-American regimes — particularly those in Ecuador and Nicaragua — which show a determined tendency towards an unlimited expansion of the state’s sphere of action.
Therefore, not discussing this because these governments still lack total control is a mistake if we care about the future; it is also inconsiderate towards their citizens. It is them who need to realize the dangerous political trajectory their countries are following. Latin Americans have confirmed several times that a leader cannot solve their problems — they can only make them worse and bring about new hardships — and that foreign intervention aggravates the situation.
A higher level of awareness among individuals regarding the true role that the state should have in their lives is the only thing that may prevent our societies from continuing to tread the road to serfdom.